How ‘Para’ streets the field

When Australia’s biggest superannuation fund, Australian Super, decided to slash the total fees it pays equity fund managers it commissioned analysis of the best performers over the past decade.

Chief investment officer
Mark Delaney
, who has control of about $14 billion in equity fund mandates, was a little shocked to find that only a handful of managers consistently outperformed their benchmarks.

Australia has about 100 equity fund managers, but according to Delaney only about five make the grade over 10 years in terms of adding value above the benchmark.

Chanticleer is drawing from Delaney’s list of elite stockpickers to launch an occasional series exploring how good fund managers beat the market.

First cab off the rank is David Paradice from Paradice Investment Management. His $1.73 billion small caps fund has achieved annualised returns since inception in June 2000 of 18.89 per cent compared with a benchmark return of 5.64 per cent. That is an annualised value add of 13.25 percentage points.

Paradice, who is better known in the broking and funds management community as “Para", started his career as an accountant at Peat Marwick before moving into stockbroking at a firm called Hattersley Maxwell.

Paradice lost his broking job following the 1987 sharemarket crash and moved into a strategy role at insurance company Mercantile Mutual.

He set up a funds management business in 2000 specialising in small caps. His firm has since expanded into mid-caps, large caps and global small mid-caps with total funds under management of $7.3 billion.

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Right from the start, Paradice took the view that he would have a self- imposed cap on his funds under management. That breaks the normal practice for global fund managers, who are paid as a percentage of assets, which means the more money in the pot the more you get paid.

A cap on funds management has given Paradice flexibility in his investments and not forced him to become a buyer of stock simply to satisfy the demands of more clients giving him money.

The small cap fund was capped at $1.73 billion and closed to new mandates in June 2002. The only new money in the fund is when another client leaves.

The return achieved in the year to December 2012 of 24.55 per cent was the best outperformance against benchmark for more than five years. The benchmark was 6.58 per cent.

Paradice found a mentor in the late Robert Maple-Brown, who founded Maple-Brown Abbott. Paradice likes nothing more than sitting around with other fund managers talking stocks.

Unlike other fund managers, who employ both analysts and portfolio managers, Paradice only employs portfolio managers. This is to ensure they take ownership of the stock picks.

Paradice and his team positioned the small cap fund well for the big market moves of 2012.

He says the recent rally in share prices is not sustainable. “You can’t keep having months that deliver a 6 per cent return," he says.

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Disgraced cyclist and confessed cheat
Lance Armstrong
is probably a long way from the thoughts of most investors, but his version of institutionalised corruption is worth closer study for those wanting to understand the dark and murky underside of a complex business world.

The Amstrong camp used a range of proven techniques to ensure that the US Postal cycling team’s institutionalised corruption was not blown open. What distinguished these efforts from others was that the strategy was entirely global.

Practitioners of the dark arts of public relations will recognise some of the methods used by Armstrong to suppress comment and maintain a surface appearance of being squeaky clean.

Armstrong’s henchmen bullied individuals who spoke out against the Tour de France winner, used commercial connections to pressure critics, issued veiled threats to other leading sportsmen who questioned his performance and fed exclusive interviews to selected journalists to keep the mainstream media onside.

The “I-am-not-a-drug-cheat" defensive strategy included using the antiquated defamation laws in the United Kingdom to stop publication of critical material. Armstrong was so brazen he was willing to take a cash settlement from the Sunday Times and to perjure himself in interviews under oath in the US.

The combination of all these techniques maximised the financial benefits that flowed to Armstrong and his sponsors during more than a decade of doping success.

Woodford was the chief executive of Japanese medical device and camera maker Olympus. He was courageous enough to champion a battle to uncover about $US1 billion in corrupt payments that had been hidden for a decade.

Garnaut, who is The Sydney Morning Herald’s China correspondent, has written an insightful book on how the murder of a British fixit man in China exposed corruption in the highest ranks of the Chinese Communist Party.

Both books are revealing of the corporate and political corruption that exist in Asia’s developed and developing countries.

Understanding how the bad guys rip people off and hide it from prying eyes is increasingly important as investors extend their investment horizons beyond one country to include all markets around world.

Those wanting to get a better handle on this real threat to ethical money making would be well advised to understand the common links between Armstrong, a leading Japanese corporate and a Chinese princeling, Bo Xilai, who appeared to be on the road to running the world’s second-biggest economy.